Deok Ryong Yoon

The Korean Economic Adjustment to the World Financial Crisis

The global financial crisis hit the Korean economy in two ways. First, the sudden reversal of capital flow dried up the domestic and international liquidity. Second, the global contraction of demand reduced Koreas export by over 40 percent in the fourth quarter of 2008. Consequently, the Korean currency depreciated sharply and the economic growth rate fell drastically. Even though Korea could not prevent the 2008 crisis, it was the first OECD country to escape the negative economic growth zone, possibly because of three reasons. First, Korea might have had better initial conditions than other economies thanks to the reform measures after the 199798 Asian financial crisis. Second, the Korean government has had significant experience in dealing with crises. Third, Korea had an international network of cooperation to establish swap arrangements of US 90 billion to stabilize foreign exchange market. Even though the Korean economy has become more resilient to future financial crises by learning from the crisis in 1997, the small open economy still has limited capacity to stabilize the financial market. Korea now faces a new issue, which is to learn from the global crisis on how to stabilize the foreign exchange market.

Understanding North Korea's Economic Crisis*

This paper provides an overview of the current economic situation in North Korea and suggests some possible strategies for recovery, including ways of mobilizing financing and implementing essential market reforms. Throughout the 1990s, North Korea suffered a severe economic downturn after the abrupt collapse of the cooperative network of socialist countries. Because the needs of the military had been given first priority and foreign trade was limited, infrastructure and capital stock deteriorated. At present North Korea is in a poverty trap, and the plans of the State Planning Commission no longer work. In addition to the official economy, North Koreas overall economic structure includes economies run by the Workers Party, the military, and ordinary citizens (the informal market). Efforts to promote foreign investment and trade, combined with only small changes in this inefficient economic structure, are unlikely to succeed. North Koreas economic rehabilitation should begin with more market-oriented policy reforms and capital formation, but because the country is unable to design and implement economic reforms or to accumulate capital stock on its own, assistance must be sought from outside.

Exchange Rate and Output Dynamics Between Japan and Korea

Japan and Korea are close countries in terms of economic interaction as well as geography. To quantify the impact of changes in the yen-dollar exchange rate on the Korean economy before and after the crisis in 1997, the sample period has been divided into two sub-periods and the causal relationships examined by using vector autoregression analysis. Our estimates show that while the response of Korean industrial production to changes in the yen-dollar exchange rate was not significant during the pre-crisis period, it became significant during the post-crisis period. The forecast error variance decomposition also confirms that the yen-dollar exchange rate shocks have almost negligible explanatory power with regards to Korean industrial production during the pre-crisis period, but they have some significance for the postcrisis period. These empirical results show that the free floating exchange rate regime adopted since the crisis cannot insulate the Korean economy from external nominal shocks such as the yen-dollar exchange rate shocks.

The Economic Implications of Financial Opening and Future Tasks

This study examines the evolution of South Korean foreign exchange system and effects of changes in foreign exchange supply channel on exchange rates. Furthermore, this study conducts the VAR analysis and the variance decomposition analysis on the effects of exchange rates to examine effects of exchange rates on financial (inflation rate) and real (economic growth, trade balance) economy, then derives policy implications.